The apparel industry in the spotlight

The apparel industry is a complex sector. Valued at US$3 trillion, the global market accounts for 2% of the world’s GDP.

Between 2000 and 2014, the number of workers employed in the sector almost tripled from around 20 million workers to 60-75 million. Over the last few decades, the industry has served as a stepping stone to economic and social development by providing employment opportunities for women, youth and low-skilled workers. Three quarters of garment workers worldwide are female. The sector also enables developing markets to pursue export-oriented industrialisation.

Despite this, the industry carries a number of significant risks to workers’ human rights, safety and working conditions across the value chain, from sourcing of raw materials to manufacturing of finished products. These risks also flow through to listed manufacturers, retailers in the apparel sector and their investors.

Engagement by PRI signatories: health and safety in the clothing sector

Objective

From 2013-2016, the sustainability asset manager, RobecoSAM, engaged with eight companies, ranging from brand owners that have their own clothing manufacturing operations, to retailers that do not engage in manufacturing, but source products from suppliers.

What is the progress?

After three years of engagement, seven of the eight companies evaluated their risk exposure and formulated health and safety (H&S) policies for their own factories and those of their suppliers. During the engagement, the selected companies developed, or are in the process of developing, a structured risk management process to ensure a better H&S profile of manufacturing facilities, and commitments to ensure better living wages for workers.

Areas for development

Subcontractors and monitoring of second-tier relationships in the supply chain are the most challenging when it comes to managing sustainability. The extent to which companies can influence suppliers in tier two and beyond is limited and is an area for development.

The industry has suffered from numerous safety incidents such as the Tazreen garment factory fire in 2012 and the Rana Plaza collapse in Bangladesh in 2013 – which resulted in the death of 1,100 workers. These events have drawn concern from consumers, stakeholders and investors regarding industrial safety. They also highlighted the complexities and lack of transparency in apparel supply chains.

The global garment industry: the geographical dimension

Whilst Asia has dominated the industry, accounting for 71% of market share in 2016, health and safety incidents in Bangladesh and Pakistan have triggered some companies to look for new sourcing destinations. One emerging region is Sub-Saharan Africa, and Ethiopia in particular. This is because of the combination of low wages, export incentives and a growing pool of labour resources, as well as convenient access to both US and European markets.However, companies may also encounter a number of environmental and social risks there, especially in cotton production. Whilst Ethiopia is regarded as a politically stable country, it may be exposed to regional unstable geopolitical risks. Alongside issues associated with labour standards, there are concerns over land usage resulting in numerous protests, which pose security threats to cotton production. According to the Verisk Maplecroft Global Risks Forecast, concerns over land grabs and usage might intensify as drought and food insecurity worsen, exposing companies not only to social but also environmental risks.

Interestingly, rising labour costs in China have caused Chinese garment manufacturers to begin to move their factories abroad to countries like Myanmar to exploit relative wage differences.

Engagement by PRI signatory: the role of pension funds in enhancing labour practices

Objective

On behalf of pension fund BPF MITT, asset manager MN engaged on ESG risk with 15 companies worldwide in the fashion and apparel industry.

What progress has been made?

MN and BPF MITT developed company engagement programmes focusing on good labour standards, especially the implementation of freedom of association, the right to collective bargaining and decent living wages. They also verified how companies hold business partners and suppliers accountable on widely accepted standards.

MN traveled to Indonesia to visit apparel factories together with local brand representatives to learn more about the latest improvements on the work floor. They also met with the Fair Wear Foundation (FWF) and local trade union leaders to hear experiences about violations of labour standards at other factories.

Areas for development

Most companies require suppliers to commit to a code of conduct. However, supplier commitment on paper does not always ensure sufficient impact on local factory level. Severely low wages are also still common in many apparel supply chains.

What can investors do?

Investors should:

ensure that freedom of association and the right to collective bargaining are in place in investee companies f supply chains;
ensure investee companies mitigate issues in their own supply chain and aim for long-term partnerships with suppliers;
encourage companies to seek cooperation with competing businesses to tackle industry problems together and liaise with governments to take down barriers to improving labour standards;
regularly communicate with local organisations to solve labour issues and gain a comprehensive understanding of the challenges for workers and trade unions when organising themselves (e.g. hostility, violence, fraud).

Engagement by PRI signatories: four years on from the Bangladesh investor statement

Objective

Following the Rana Plaza collapse in 2013, more than 200 investors representing over US$4.3 trillion signed an investor expectations statement. It urges companies to sign the Accord on Fire and Building Safety in Bangladesh and provide actions to remediate building safety hazards and the continuation of worker safety training. In June 2017, companies and global unions agreed on a second accord, which will come into effect in May 2018.

What progress has been made?

Workplace safety in garment factories in Bangladesh is believed to have improved, with over 400 accord factories completing 90% of the remediation plans. These plans cover corrective actions undertaken to fix inadequately protected fire exits, inadequate fire alarm and fire protection systems, and electrical and structural safety measures that have been identified by independent inspections. The Alliance for Bangladesh Worker Safety, a similar coordinated industry response, was highlighted by investors to have shown less robust progress. Investors voiced concerns including lack of transparency and not following through on corrective action plans, and emphasised the need to ensure remediation of outstanding issues and publicly report on progress.

Areas for development

Despite encouraging progress, investors recognise that remediation has been slow, partly because funding needs to be negotiated, reflecting a lack of trust between factory owners and brand companies. Investors who support the statement recommend, amongst other issues, to:

assess financial capacity of suppliers and ensure proper financing is available to expedite the remediation of more costly safety hazards, such as enclosed stairwells, sprinkler systems, hydrants and structural retrofitting;
ensure remediation of outstanding issues and publicly report progress;
broaden the current accord to include a focus on freedom of association and collective bargaining and integrate this into the complaints mechanism process and additional parts of the supply chain where similar risks exist.